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Economies of Note

The Australian dollar has made gains this week helped by some slightly better than expected second tier data. NAB business conditions and confidence both came in stronger than forecast, with business conditions now back to around pre-GFC levels and above the long run average. Westpac consumer confidence for July also improved printing at +0.4%. The index has a long way to go however as the three months prior to this saw consecutive declines. Overall the index isn’t giving great signals about the outlook for consumer spending. Yesterday we also saw the release of consumer inflation expectations from the Melbourne Institute which jumped from 3.6% to 4.4%. Next week should be more interesting with the RBA minutes set for release along with employment data.

New Zealand
It’s been a very quiet week on the data front from New Zealand this week with only the BNZ manufacturing index set for release later this morning of any real note. The New Zealand dollar has however seen some volatility with weakness during the middle of the week and a strong rebound over the past 12 hours. Next week we have inflation data to digest along with another dairy auction and visitor arrivals.

United States
There hasn’t been a lot to focus on data-wise so far this week out of the United States, although tonight sees the release of inflation and retail sales figures, both of which could impact the currency. The market has however had plenty to digest with a number of Fed speakers, Janet Yellen’s semi-annual testimony, and more Tump-Russia hysteria. Most of the above has been somewhat US dollar negative. The Trump-Russia witch hunt has once again taken the focus off the White House’s economic agenda and the more time the administration spend fighting fires on that front, the less they can actually achieve economically. In terms of Fed speakers we heard from Brainard and Harker this week both of whom seem to be on the same page as Janet Yellen who gave her semi-annual testimony to congress this week. There seems to be a clear message been put out there that although the Fed plans to continue to hike interest rates, it will be slow going and the “neutral rate” is probably not far away. The Fed also look set to start unwinding their balance sheet, which ballooned during quantitative easing, in the coming months. That process too, will be extremely gradual. It seems we may get an announcement on that at the September meeting, while the next interest rate hike is looking most likely for December. In her testimony Yellen said the Fed is not only uncertain about the outlook for inflation, but that the federal funds rate may “not have to rise all that much further go get to a neutral policy stance.” The USD declined in the wake of these comments.

United Kingdom
The United Kingdom released some decent employment data this week. The claimant count (unemployment claims) grew by 6k, less than the 10.5k expected. The unemployment rate also dropped to 4.5% from 4.6% prior. That’s the lowest unemployment rate since 1975! Unfortunately the low unemployment rate isn’t feeding through into massively higher wages. UK average earnings came in at +1.8%, that’s down from the +2.1% prior. Although the Bank of England now have a tightening bias, they probably don’t need to panic as inflation is hardly going to soar if wages are struggling to grow. There are however divisions within the central bank’s monetary policy committee and those were on full display this week with comments from Broadbent, who said he’s “not ready” to raise rates yet, while McCafferty said he will likely vote for a quarter point rate rise again next month. S&P released a report on the UK this week and they see the BoE holding off hiking interest rates until mid 2019. They say the decline in real wages will weigh on household spending and UK GDP will likely slow to 1.4% this year due to Brexit uncertainty. Next week we have inflation and retail sales data to digest.

We’ve seen only minor data out of the Eurozone this week and none of it has had any real impact on the economic outlook or the foreign exchange markets. The latest poll from Germany, ahead of their election in September, made good reading for Angela Merkel with her Conservative coalition having a 17 point lead. The Eurozone dodged a serious bullet with outcome of the French election and it looks like the German one could be EUR positive as well. Next week should be more interesting with inflation data, German ZEW Economic Sentiment and the ECB’s latest rate meeting.

The Japanese Yen saw pressure through the first half of the week helped in part by comments from the Bank of Japan’s Kuroda. He said the central bank will keep YCC (yield curve control) and maintain ultra-easy monetary policy as long as is needed to achieve 2% inflation in a stable manner. In terms of data this week we saw some disappointing results from Core Machinery Orders and the Current Account, while the Economies Watches Sentiment index increased a touch to 50, and Tertiary Industry Activity also came in better than forecast. Next week will start slowly with a Japanese Bank holiday on Monday, but later in the week we have the Bank of Japan’s Monetary Policy Statement to look forward to.

This week was all about the Bank of Canada’s (BoC) interest rate decision on Wednesday night, and they didn’t disappoint creating some real fireworks in the Canadian dollar. As widely expected they hiked interest rates by 0.25%, taking the overnight rate to 0.75%. That’s the first hike in seven years. What really drove the CAD however was the hawkish tone to the accompanying statement. The market is now confident we will see further interest rate hikes, the timing however remains open for debate. There is now a 70% chance of another hike by December priced into the market. Recent strength in Canadian data has driven this move by the BoC and in the near term the outlook for the economy remains good. Longer term however there are worrying signs about just how the economy will handle higher interest rates. The housing market in Canada has long been an area of concern with parts of the country seeing gains that could easily be described as a bubble. Household debt to income ratios are also around 50% higher in Canada than in the US, while Canadian wages are going at a much lower rate of around only 1.5%, compared to 2.5% in the States. As interest rates go up, the ability of Canadian’s to service all that debt is going to come into question.

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